Real estate fund manager market validation discussion document final
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The document discusses the operational and infrastructure challenges faced by the real estate investment and funds management market, emphasizing the inadequacy of current software and back-office solutions. It highlights the need for improved data management, integration, and transparency in reporting to address these issues and better serve investors. Through market validation interviews, it identifies a growing gap in software capabilities and the demand for more comprehensive and unified solutions in this sector.
Real estate fund manager market validation discussion document final
- 1. Real Estate Investment and Funds Management Operational and Infrastructure Challenges Implications for BPO Usage Discussion Document for Market Validation Interviews www.frontlinepartners.net This document is confidential and is intended solely for the RE Fund Manager Market Validation Discussionand information of the client to whom it is addressed. use Document CONFIDENTIAL AND PROPRIETARY 1
- 2. Real Estate Investment and Funds Management Operational and Infrastructure Challenges Implications for BPO Usage Table of Contents Introduction and Discussion Topics 3 Real Estate Investment and Funds Management Market - Technology and Services Market Overview 5 Results of Real Estate Software Market Validation Interviews 10 Real Estate Investment and Funds Management Market - Operational Challenges and Industry Grievances 15 Implications and Conclusions for Real Estate Investment and Funds Management Back Office / Business Process Outsourcing (“BPO”) Solutions 22 Appendix - Firm Overview, Selected Experience Profiles and Case Studies 28 RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 2
- 3. Introduction and Discussion Topics RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 3
- 4. Introduction and Discussion Topics FrontLine Partners is engaging with customers and participants in the real estate investment management market regarding the state of back-office support and software solutions Introduction Provide an Overview of the RE Fund Manager Technology and Services Market and Share Our Views Engage in an Information Exchange that will Promote Education About Operational Challenges / Industry Grievances / Issues Our purpose is to share our view of operational & infrastructure challenges in the RE fund manager market, discuss state of software and back-office solutions, and explore potential BPO solutions Understand Your Thoughts and Views About Back-Office and BPO Solutions and Their Place in Real Estate Funds Management RE Fund Manager Market Validation Discussion Document Assist You in Determining the Right Way to Move Your Company Forward in Exploring Back-Office and BPO solutions in the Funds Management Market CONFIDENTIAL AND PROPRIETARY 4
- 5. Real Estate Fund Manager Technology and Services Market Overview » Project Framework and Timeline » Project Methodology and Approach » Key Document Section Description RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 5
- 6. Real Estate Fund Management Growth Characteristics (2004-2012) FRONT-END GROWTH DRIVERS The market grew approximately 200% in funds (386% on fund size) from 2004 to 2008, but has since plateaued and started to rebuild itself after the financial market back-up in late 2008 and early 2009. 2004 (#) 2005 (#) 2006 (#) 2007 (#) 2008 (#) 2009 (#) 2010 (#) 2011 (#) 2012 (#) Opportunity NA NA 93 118 153 168 186 191 193 Valueadded NA NA 102 158 180 161 119 128 125 Core-plus NA NA 27 45 55 38 26 26 30 High-Yield Debt NA NA 28 44 54 73 67 62 59 Fund of Funds NA NA 7 17 24 26 17 20 22 Total # Funds 159 205 257 382 466 466 415 427 429 Total # Fund Operators 121 139 206 280 355 361 342 346 359 Aggregate Equity Goals ($B) $64 $90 $130 $235 $311 $312 $241 $244 $239 Source: Real Estate Alert 3/14/2012 RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 6
- 7. FRONT-END GROWTH HAS Front End Growth Has Simply Out-stripped Back End BACK END SUPPORT SIMPLY OUT-STRIPPED Support Tremendous growth has occurred in the institutional real estate investment management market. However the software and back-office solution providers have failed to keep pace. As a result, too much time, energy and efforts are spent by high priced fund management staff on basic data management, accounting and reporting functions. Business Growth Drivers Real estate performance has fueled investor demand as a separate asset class and significant queue of capital raised; seeking deployment to manage risk and returns. Significant growth in number and size of funds, as well as number of fund operators REITs are increasingly crossing over into the fund management market (either directly by adopting the funds management model or via JV’s and coinvestment programs). Globalization of the owner/operator sector is a key trend in this sector, as exemplified by the latest estimates of 244 REITs in 24 countries. 28 countries are likely to have REITs in the next 24/36 months. RE Fund Manager Market Validation Discussion Document Gaps in Software and Back-Office Solutions Currently, software providers can not handle the complex layers of visibility from property level all the way through to fund and investor reporting level. There is a shortage of software solutions in the market, so there is a high degree of customization to platforms. Significant industry wide operational and infra-structure challenges are facing the real estate investment management market Data Standards Document Management Operational and Process Hand-offs Complexity in Accounting and Financial / Investor Reporting Need for Greater Portfolio Risk Management and Transparency CONFIDENTIAL AND PROPRIETARY 7
- 8. Market Structure and Need for Reporting / Analytics Most real estate investors are at least “arms length” from understanding and predicting the cash flow returns from the underlying asset, and need greater performance analytics and risk management solutions to drive decisions impacting fund / investor returns R/E Fund & Investment Market Structure and Requirements What They Do … Pension and Asset Funds Their objective is to determine the correct investment strategy for their investors and place the funds in the correct asset class (stock, bonds, real estate) to achieve those returns Place capital with real estate owners What They Need … Institutional Investors Manage money for retail and institutional investors Who They Are … Fund Managers Their objective is to place capital that can be invested in real estate to return a predictable range of cash flows / returns to the portfolio/fund REITS (Private, Public)1 Their objective is to make good decisions about which assets to purchase, determine how they should be operated, and to maximize returns at the portfolio level Manage properties as owners or as sub-contractors to REITS Property Managers Their objective is to operate the building and maximize return at the asset and tenant level Real Estate Companies Provide pools of capital to invest in assets (buildings) Consolidated asset cash flows and unit returns from fund managers plus the ability to model what-if scenarios and forecast at the portfolio level, plus comparisons across investments and fund managers Consolidated asset cash flows and unit returns from real estate owners plus the ability to model what-if scenarios and forecast at the portfolio / fund level and return / distributions calculators Consolidated tenant and asset data for decision making and reporting to fund managers or Wall Street, plus the ability to model what-if scenarios and forecast at the portfolio and entity level Emphasis on NOI, tenant lease rollovers typically handled in Argus, Excel Note: (1) Select REITS may utilize a fund management business model but are still considered real estate companies (e.g., Kimco, HCP) RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 8
- 9. Information Requirements – A Large Gap in Where to Focus Real estate companies want to value and project on asset and tenant data, while institutional investors want to value and model on cash flow and investment return basis Market Information Requirements Real Estate Market Players Information Needs2 Ownership / Investment Capital Source Their objective is to determine the correct investment strategy for their investors and place the funds in the correct asset class (stock, bonds, real estate) to achieve those returns Institutional Investors Pension and Asset Funds Capital Source Fund Managers Their objective is to place capital that can be invested in real estate to return a predictable range of cash flows and returns to the portfolio/fund Capital Source Cash Flow & Investment Return Driven Real Estate Companies REITS (Private, Public)1 Their objective is to make good decisions about which assets to purchase, determine how they should be operated, and to maximize returns at the portfolio level Financial/Return Information, Ability to model forward looking returns and what-if scenarios Asset and Tenant Driven Owner Owner Owner Asset Level Information, Ability to model forward looking returns and what-if scenarios Tenant and Asset Information Property Managers Their objective is to operate the building and maximize return at the asset and tenant level Multiple Properties Note: (1) REITS can look like fund managers but are still considered real estate companies (e.g., Kimco, HCP). (2) Information needs flow upwards while the capital flows down. RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 9
- 10. Results of Real Estate Software Market Validation Interviews » Project Framework and Timeline » Project Methodology and Approach » Key Document Section Description RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL 10
- 11. R/E Software Market Validation Interview Targets Owner/ Operator In connection with a significant corporate development project in the real estate software market, we conducted a number of high level market validation interviews. We interviewed an average of five to six companies in each market segment. Company Description Multi-Family Owner Operator Retail Owner Operator Retail Owner Operator Multi-family Owner Operator Retail Owner Operator Role CTO SVP and CIO Vice President of IT Former (Retired) CIO Global CIO Capital Markets Capital Markets Lender Servicer EVP and COO Investment Manager SVP Investment Manager Investment Manager Vice President of Technology CTO Investment Manager President Lender Servicer Executive Vice President (COO) Note: Corporate Real Estate Sector excluded from this summary extract RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL 11
- 12. Market Validation Interview Conclusions Overall, respondents confirmed our hypothesis that the real estate software market is limited in its ability to deliver the required solutions to the market Conclusions Hypothesis There is a gap in the real estate software market offering; specifically in the capital markets, owner/operator, and corporate real estate segments. Our interview candidates agreed with this hypothesis. Most believed that the gap is widening; and current players were unlikely to be able to close the gap on their own. The real estate software gap is more pronounced in business analysis, intelligence, and integration functionalities. Respondents in capital markets and owner/operator agreed that there were very few mature BA and BI products. The respondents all noted issues with integration & access to data from multiple sources. Real estate companies are looking for more robust solutions across their business – more than just point to point solutions. One of the strongest conclusions from the interviews is the real estate industries desire to have a unified offering that could meet at least 70 percent of their overall needs. RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL 12
- 13. Key R/E Software Market Validation Interview Quotes Overall, interview respondents validated the need for more robust solutions in the real estate software market Key Interview Quotes Market/Product Specific » “There is a lot of data coming from lots of places. No industry standards. Spending lots of time integrating.” » “Reporting, scenario analysis, modeling and what-if’s are very difficult to do” » “From a technology perspective, the industry has fallen short of delivery.” » “If the solution meets our needs we are willing to pay for a one-stop-shop.” » “The market needs a provider to build a solution to meet our needs” » “The market is looking for a clear software leader.” Current Technology Provider Specific » “We also need real estate technology vendors that are committed to the industry long term.” » We have lower expectations for generic software providers and higher expectations for real estate market players.” » Market is full of small players with limited resources & vision” » “Real estate software companies could do a better job of leading real estate companies.” » “Current vendors by themselves cannot meet long-term needs of the market“ » “Our technology providers only grow when we grow, this needs to change.” » “They need stability, focus & capital” RE Fund Manager Grievances and BPO Market Document CONFIDENTIAL 13
- 14. Score Card Summary – Capital Markets (Funding) The top software providers in capital markets (funding) focus on asset management and property accounting but come up short on fund management, deal analysis and investor reporting Capital Markets (Funding) Interview Score Card Technology Provider Overview Technology Overview Average Technology Expenditure $0-10M $11-20M $20+M Top 3 Vendors Follower Reporting (JV Partner) Investor Relations » Asset Funding Legal Compliance » Accounting/Back-office Leader Vendor Analysis Key Uses of Technology » » » » Deal Analysis and Management » Yardi MRI Argus » » » » » Average Degree of Technology Adoption Limited Market (Functional) Requirements Deal Analysis Investor Reporting Asset Management Accounting/Back-office Strengthens » Yardi has a solid financial system for property management and entity level accounting. » MRI is best known for its flexibility. » Argus has a good cash flow system. Key Conclusions » » » Utilization of spreadsheets. Complex modeling with limited time and tools. Increasing investor reporting requirements and limited technology to provide information at the asset level. Weaknesses » The software providers do not have a global offering. » The software providers do not have integration capabilities. » Neither software vendor have good real estate SME resources. RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY The market needs more integration between software components. » Key Technology Challenges » Software providers in the market have limited means to conduct BA and BI. They are mainly focused on offering transaction management. » The market has limited solutions for work flow and collaboration. » There is a clear opportunity to provide functionality to the capital markets (funding) segment that current providers do not offer. 14
- 15. R/E Investment and Funds Management Market - Operational Challenges and Industry Grievances » Project Framework and Timeline » Project Methodology and Approach » Key Document Section Description RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 15
- 16. Operating Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.) A bewildering array of evolving industry standards creates challenges for data standards and consistent industry definition sets or benchmarking Key Operational Challenges and Industry Grievances Operational Challenge Data Standards Industry Grievances or Issues There are a variety of evolving industry standards – depending on scope (i.e. accounting, tax, reporting, valuation, etc.); however no uniformly accepted data definition set and consistent benchmarking. Accounting treatments GAAP, FASB (13, 141, 157, 159, etc.) IFRS Tax treatments & practices Standard & influencing bodies NCREIF, NAREIT, NAREIM INREV, EPRA OSCRE, PISCES ALFI Valuation mechanisms Indexes Lease-based DCFs Performance measures & reporting NCREIF, etc. AMIR, AMIR Gibson IPD RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 16
- 17. Operational Challenges & Industry Grievances (R/E Inv. & Funds Mgmt.) Data management challenges pose one of the largest time drains of highly paid fund management talent, suggesting an opportunity for data warehousing and management Key Grievances and Operational Challenges Industry Grievances / Issues Operating Challenge Data Management (Collection/Warehousing and Mgmt.) Processes for collections and management of data which worked on small scale are simply inefficient given size of industry Talented, highly paid real estate personnel spend too much time chasing and inputting data. Credibility of data used to manage investments and report to investors is too reliant on manual data entry with no (or limited) repeatable controls to assure consistent treatment of the data. Fund managers and their operating partners use an array of financial reporting and property management systems. Systems include: MRI, Yardi, CTI, JDE/Peoplesoft, Treesoft and other systems Fund managers have to extract select information to run high level portfolio reports to measure asset and fund level performance Collecting and processing information from operating partners is typically inefficient and cumbersome, with little real protocols followed. Complications / complexity stems from fund manager receiving data from multiple heterogeneous sources (and systems) that don’t use same data process, data requirements and /or data definitions. Data consolidation and data integrity issues are common Principally due to manual consolidation of reports to portfolio level reports; Very little time for quality data analysis as majority of time in compilation RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 17
- 18. Operational Challenges / Industry Grievances (R/E Inv. & Funds Mgmt.) The back-office support environment is woefully under-equipped for the significant growth in number of funds and assets under management Key Operational Challenges and Industry Grievances Industry Grievances / Issues Operational Challenge Operational Processes & Hand-offs Complexity in Financial Accounting / Investor Reporting Lack of integration, along with a proliferation of manual processes foster complexity, threatens data integrity Manual processes are costly. The cost of the time and resources required increases operating expenses and impacts the organization’s ability to meet growth targets and focus on its core business – delivering financial returns to its investors Business processes are often inconsistent at the property level Limited to nominal sharing of industry best practices in any meaningfully coordinated way at the industry level Growth in number and complexity of legal entities based on fund structures and other factors has resulted in varying processes, policies and use of systems across the fund manager organization with increasingly impacts the ability of the organization to effectively report on critical information Dissimilar and manually intensive accounting, financial reporting and analysis processes for fund operations impact the visibility across the portfolio / fund / firm’s overall holdings. As a result, interaction with and responses to joint venture partners, investors and analysts (if public) is affected. Portfolio Risk Mgmt. / Reporting / Transparency The industry must now manage risk – real and perceived – much more aggressively. The loaded people cost (including hiring, training, retention and management) to support the asset (risk) management function has become a large operational expense. Return pressures over the past few years have caused more demands from investors on the fund manager for greater transparency RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 18
- 19. Investor Information Structure / Complexity for Transparency Fund managers must account for varying degrees of ownership and have the ability to aggregate / synthesize data across multiple levels (i.e. investment, fund level, investor level, etc.) to meet increasing investor demands for transparency Investor Interface and Reporting Information Structure Consolidated Investor Investor Investor Portfolio Fund & Portfolio Fund / Separate Account Consolidated Properties Fund Activity Investment Level Office Bdg. 1 Office Bdg. 2 Property 1001 1002 Building B1 B1 Industrial Portfolio Premises 1003 1004 B1 RE Fund Manager Market Validation Discussion Document B1 B1 B1 B1 CONFIDENTIAL AND PROPRIETARY 1006 1007 B1 B1 1005 B1 B1 B1 B1 19
- 20. Investor Information Structure Investors rely on information gathered from the property locations to make critical investment decisions and complete the reporting cycle Our Focus Investor Interface and Reporting Source: Real Foundations, Whitepaper –Maximize Real Estate Fund Performance RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 20
- 21. Operational Processes and Multiple Hand-Offs Lack of integration, along with a proliferation of manual processes foster complexity and threatens data integrity and reliability Property Mgmt. Unrelated Databases by Property Inefficient Data Entry Multiple Charts of Accounts Leasing Agents Property Manager A Asset Mgmt Portfolio Mgmt Reliance on Property Managers Resource-intensive Lack of Timeliness Data compilation vs. Data Analysis Manual Data Transfer Into Multiple Analysis and Report Tools Manual Calculations & Reporting from Multiple Sources Leasing Agents Valuation Lawyers Bankers Investment Mgmt Risk of Non-compliance with Industry Standards Potential Loss of Credibility with Investors Hindrance of Capital Growth Lawyers Investor QRTLY Operational Data ASSET MGMT. 1 Portfolio 1 Tenants Quarterly Information & Performance Property Manager B Monthly Financial Data Property Manager C Investor 2 Portfolio 2 Investor 3 Source: Real Foundations, Whitepaper –Maximize Real Estate Fund Performance RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 21
- 22. Implications and Conclusions for Real Estate Fund and Investment Management Back-office BPO solutions » Project Framework and Timeline » Project Methodology and Approach » Key Document Section Description RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 22
- 23. Funds Management Value Chain Our initial assessment suggests that portfolio management and finance, investment management and fund administration be considered for back office / BPO solutions Operational Infrastructure Support Fund Management Value Chain Investment Strategy/ Market Research » Strategy Formation Data collection, storage and integration Compilation / interpretation of analysis Aggregation / distribution of analytics output » Key Processes » » » » » » Capital/ Fund Formation Investor/ partner acquisition Fund Formation Partnership structures Relationship management Acquisition and Dispositions » » » » » Deal sourcing Market analysis Due diligence Underwriting Buy – Sell – Hold analysis Disposition marketing » » » » » » » » Key Cost Drivers • Purchase of external data • Size of in-house research team • Number of clients, • funds and • structures • Size of capital investment Number of transactions Complexity of investment / type and variety of asset types • Portfolio turnover Property Management Tenant services delivery Tenant relationship Management Lease Administration Vendor Management Facilities Management Billing and Collections Invoice Management • Number of portfolios • Number of investors • Leverage of operating partners Portfolio Investment Management Management and Finance Property Accounting » » » » » Budget / forecasting A/R billing and collections A/P / purchasing Financial reporting Closing • Number of properties • Portfolio roll-ups • Degree of leverage by operating partners » » » » » Business plan management Performance monitoring and reporting Debt management Fund tracking Return/cash flow calculations • Number of portfolios • Complexity and variability of underlying investments • Tiering of Funds » » » » » » Investment management Investor or joint venture reporting Investor communications Industry compliance Maximizing returns Capital planning and deployment • Number and complexity of investor requirements • Fund vs. programmatic vs. separate account Fund Administration » » » » Fund accounting Statement generation Fund statutory and regulatory reporting Cash inflow/ ouflow record keeping • Number of portfolios / funds / partnerships • Variability in capital call and funding needs Degree of Inclusion Indicates primary segments for BPO solutions RE Fund Manager Market Validation Discussion Document Low Probability CONFIDENTIAL AND PROPRIETARY Med. Probability High Probability 23
- 24. Real Estate Investment Management – Functional ‘Environment’ Investment Selection » » » » » » » » Sourcing Market Research Deal Review Feasibility Analysis Underwriting Cash Flow Sourcing to Fund LOI / MOU Deal Package Prep Investment Approval (Preliminary) Post Acquisition » Deal Structuring » Entity Structuring » Asset Mgmt. Agreement » Engage Svc. Providers » Document Turnover » Asset Takeover » Data Conversion » Asset Mgt. Handoff Fund Management Acquisition Full Due Diligence Financing Market Appraisals Purchase/Sale Agreement » Investment Approval Final » Closing » » » » » » » » Dispositions Hold / Sell Analysis Bid / Deal Structuring Disposition Approval Wind Down Strategic Research / Fund Setup » Macro Research » Regional Research » Country Research » Product Research » Fund Strategy Dev. » New Fund Approval » New Fund Launch Asset Management Investment Administration » Investor Relations » Investor Communications » Investor Reporting Fee Establishment » Asset Mgt. Fees » Performance Fees » Development Fees Investor Marketing/ Communications » Investor Targeting » Fund Road Show » Investor Recruitment » Investor On-boarding » Event Management » Marketing Mgmt. » Investor Queries » Fund Cross Selling Fund /Portfolio Administration & Reporting Fund Accounting » Fund Structuring » Fund Accounts Setup » SPV Accounting » Hold Co Accounting » Cash Position Tracking » Capital Call Calc. » NAV Calculations » Fee Calculations » Monthly Closing » Hedge Accounting Fund Administration » Entity Setup » Capital Call Statement » Capital Acct. Tracking » Tax Compliance » Safe-Keeping » Trustee & Fiduciary Supervision » Entity Wind Down Asset Management » Business Plan Mgmt. » Performance Monitoring Property Valuation » Provider Selection » Data Setup/Validation » Assumption Validation • Capital Expense • Income • Market • Global » Property Valuation » Annual Valuation Portfolio/Fund Reporting » Monthly Actuals » Asset Mgmt. Report » Quarterly Fund Report » Return/Cash Flow Analysis » Property Performance and Metrics Evaluation Finance » Capital Planning » Capital Development » Cash Flow Mgmt. » Cash Forecasting Debt/Equity Mgmt. » Debt Management » Equity Management » Debt/Equity Reports What-If Analysis » Assumption Definition & Refinement » Portfolio/Fund What-If Analysis Asset Data Aggregation Data Governance » Data Standard Definition & Maintenance • Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts Data Refinement Data Movement & Storage » Data Adjustments (within limits) » Communications (w/ Data Sources & Consumers) » Oversight of Inbound & Outbound Data Fidelity KEY: Fund Manager Client Functions Asset Controlling & Reporting Fund / Portfolio Admin & Reporting Data Aggregation / Mgmt. Property Reporting » Financial Reporting » Ops Reporting » Capital Projects Reporting Potential Additional Real Estate Functions Asset Accounting » GAAP Translations » GAAP Adjustments » Ownership/ / Partnership Entries » Tax Entries » Accruals & Allocations » FX Conversions » Other Non-Cash Adjustments » Month-End Close JV Accounting Oversight / Interface » Financial Reporting Review » Ops Reporting Review Property Svc. Provider Functions Property Operations, Accounting & Budgeting Property Budgeting Property Accounting » Rent Roll Setup » CAM Reconciliation » Income & Exp. » Property Accruals Assumptions » Capital Expenditures » Op Expense Budgeting » Bank Reconciliations » Cap Expense Budgeting » Budget Approval Billing & Collections » Lease Administration » Billing Setup » Monthly Billing » A/R & Collections Tracking RE Fund Manager Market Validation Discussion Document Accounts Payable Property / Building Mgmt. » Vendor Setup » Property Management » Invoice Management » Facilities Management » Check Generation Leasing » Market/Business Dev » Leases Execution » Lease Renewals » Lease Forecasting CONFIDENTIAL AND PROPRIETARY Capital Projects / Development Mgmt. » Design » Bidding & Contracting » Project Management » Construction Accounting & Rptg. 24
- 25. REAL / Back-Office Solutions Process Selection for Inclusion in BPO ESTATE INVESTMENT MAAGEMENT – To begin our initial assessment, we’ve highlighted in red, those functions that would be FUNCTIONAL ‘ENVIRONMENT’ candidates for further screening / analysis Investment Selection Sourcing • Market Research • Deal Review • Feasibility Analysis • Underwriting Cash Flow • Sourcing to Fund • LOI / MOU • Deal Package Prep • Investment Approval (Preliminary) Acquisition • Full Due Diligence, Financing • Market Appraisals • Purchase/Sale Agreement • Investment Approval Final • Closing Post Acquisition • Deal Structuring • Entity Structuring • Asset Mgmt. Agreement • Engage Svc. Providers • Document Turnover • Asset Takeover • Data Conversion • Asset Mgt. Handoff Dispositions • Hold / Sell Analysis • Bid / Deal Structuring • Disposition Approval • Wind Down Fund Management Investor Marketing/ Communications • Investor Targeting • Fund Road Show • Investor Recruitment • Investor On-boarding • Event Management • Marketing Mgmt. • Investor Queries • Fund Cross Selling Strategic Research/ Fund Setup • Macro Research • Regional Research • Country Research • Product Research • Fund Strategy Dev. • New Fund Approval • New Fund Launch Investor Relations • Investor Communications • Investor Reporting Fee Establishment • Asset Mgt. Fees • Performance Fees • Development Fees RE Fund Manager Market Validation Discussion Document Fund /Portfolio Administration & Reporting Fund Accounting • Fund Structuring • Fund Accounts Setup • SPV Accounting • Hold Co Accounting • Cash Position Tracking • Capital Call Calc. • NAV Calculations • Fee Calculations • Monthly Closing • Hedge Accounting Fund Administration • Entity Setup • Capital Call Statement • Capital Acct. Tracking • Tax Compliance • Safe-Keeping • Trustee & Fiduciary Supervision • Entity Wind Down Portfolio/Fund Reporting • Monthly Actuals • Asset Mgmt. Report • Quarterly Fund Report • Return/Cash Flow Analysis • Property Performance and Metrics Evaluation CONFIDENTIAL AND PROPRIETARY Asset Management Asset Management • Business Plan Mgmt. • Performance Monitoring Property Valuation • Provider Selection • Data Setup/Validation • Assumption Validation • Capital Expense • Income • Market • Global • Property Valuation • Annual Valuation Finance • Capital Planning • Capital Development • Cash Flow Mgmt. • Cash Forecasting Debt/Equity Mgmt. • Debt Management • Equity Management • Debt/Equity Reports What-If Analysis • Assumption Definition & Refinement • Portfolio/Fund What-If Analysis 25
- 26. REAL ESTATE INVESTMENT MANAGEMENT – Process Selection for Inclusion in BPO / Back-Office Solutions FUNCTIONAL ‘ENVIRONMENT’ To begin our initial assessment, we’ve highlighted in red, those functions that would be candidates for further screening / analysis. Asset Controlling & Reporting KEY: Data Aggregation / Management Property Reporting • Financial Reporting • Ops Reporting • Capital Projects Reporting Fund Manager Functions Fund / Portfolio Admin & Reporting Data Aggregation / Mgmt. Potential Additional Real Estate Functions Property Svc. Provider Functions Data Governance • Data Standard Definition & Maintenance • Properties, Spaces • Tenants, Leases, Charges • Operating & Capital Expenses • Budgets/Forecasts Asset Accounting • GAAP Translations • GAAP Adjustments • Ownership/ Partnership Entries • Tax Entries Data Movement & Storage • Communications (w/ Data Sources & Consumers) • Oversight of Inbound & Outbound Data Fidelity Accruals & Allocations • FX Conversions • Other Non-Cash Adjustments • Month-end Close Data Refinement • Data Adjustments (within limits) JV Accounting Oversight / Interface • Financial Reporting Review • Ops Reporting Review Property Operations, Accounting & Budgeting Property Accounting Billing & Collections • CAM Reconciliation • Lease Administration • Property Accruals • Billing Setup • Op Expense Budgeting • Capital Expenditures • Monthly Billing • Cap Expense Budgeting • Bank Reconciliations Property Budgeting • Rent Roll Setup • Income & Exp. Assumptions • A/R & Collections Tracking Accounts Payable • Vendor Setup • Invoice Management • Check Generation Property / Building Mgmt. Leasing Capital Projects/ Development Mgmt. • Property Management • Market/ Business Dev • Design • Facilities Management • Leases Execution • Project Management • Lease Renewals • Bidding & Contracting • Construction Accounting & reporting • Lease Forecasting • Budget Approval RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 26
- 27. Implications and Conclusions for R/E Fund & Investment Mgmt. Real estate software providers have not provided the depth of service required by investors and owners – the software model has not been widely embraced and the market is open to new service based solutions Conclusions » On the whole, software providers in real estate are not evolving quickly enough to meet the needs of the money sources (e.g., REITs, fund managers). They view the market from a property management (asset) perspective and not a financial (cash flow) perspective. Additionally, the market is going global and most providers lack the financial resources to go global. » REITs, funding sources, and investment fund managers require more sophisticated analysis on cash flows. They want to achieve modeling capabilities that exist in equity and fixed income markets. They do not currently have the tools or methodologies to analyze risk, what-if scenarios, portfolio benchmarking and modeling. » Current software providers are enabling real estate companies to do very basic investor reporting and income distribution. They are not enabling the higher value modeling and portfolio management required by the financial institutions. » Software providers see the growth in moving from property management to investment/portfolio management in real estate and going global. We believe the real opportunity is providing those services and solutions to the financial services companies and institutional investors. » We believe a dedicated real estate funds administration / BPO firm focused on this market will enable clients to continue to focus on activities that are higher value, than data collection, management and reporting RE Fund Manager Market Validation Discussion Document CONFIDENTIAL AND PROPRIETARY 27
- 28. Appendix Firm Overview Select Experience Profiles (BPO/Optimization) Select Case Studies CONFIDENTIAL AND PROPRIETARY 28
- 29. FrontLine Partners - Market Offering and Focus FrontLine Partners tailors our services to meet the requirements of each of the market segments we support. Each of our customers requires different approaches to building or restructuring their business; some businesses require a consultancy approach while others require a deeper operating partnership. Whatever the requirement, our firm's partners and experts can deliver the required execution and long-term support. Our Services Include … Our typical clients are: Business Strategies and Feasibility Research » Owners / Operators / Developers Business Formation and Launch Service Offering BPO / Operations Diagnostics Acquisition (Buy Side) Due Diligence Pre and Post Merger Integration » Lenders (Portfolio / Securitized) » Institutional Investors » Fund Managers » Intermediaries Corporate Entity Level Restructuring » Service Providers Troubled Loan / Asset Workouts » Technology Providers Portfolio and Risk Management Reviews We bring our knowledge and market access to our clients CONFIDENTIAL AND PROPRIETARY 29
- 30. FrontLine Partners – Selected Experience Profiles (BPO/Optimization) Client or Employer* Industry Project Profile Outcome New Plan Retail REIT Outsourcing strategy and migration of over 100 retail accounting jobs offshore for a top ten retail REIT » Formulated outsourcing strategy after considering range of control options (captive, BOT, supplier); » Identified, evaluated and selected supplier through RFP and competitive bidding process » Advised on three year supplier contract » Created enterprise cost savings and better A/R collection New Plan / GRO retail industry JV Retail REIT industry JV Planning for industry JV for retail accounting captive » Conducted initial planning and JV structuring formation for industry JV targeting captive Build – Operate – Transfer model for major Retail REITs ING R/E R/E Fund Manager Operational Process Improvement » Conducted core process improvement across entire real estate fund management platform Capital Group* Investment Company shared service center supporting multiple entities Top Five R/E Fund Manager Real Estate Fund Manager (in process) Shared service center feasibility for back office fund mgmt. functions » Subcontractor to consulting firm assisting large real estate fund manager evaluate feasibility and operating migration plans for shared service center BNY Asset Solutions Rated Master and Special Servicer Turn-around rated servicer for Bank of New York » Turned around BNY servicing subsidiary ($16B of servicing, 90+ institutional accounts, 70+ employees, and six business lines) in one year Ocwen Financial* Global BPO Business for Resi Mortgages Build and manage Global BPO business Mortgages » Built and managed Ocwen’s BPO business for mortgage outsourcing to number 2 position in the world FrontLine Experience with BPO / Enterprise OptimizationDeveloped and oversaw » Transformed shared services of a global, public real Security Public R/E RE Fund Manager Market Validation Discussion Document estate company with investments in major real estate operating businesses with over $26 billion in total assets. CONFIDENTIAL AND PROPRIETARY 30
- 31. FrontLine Partners Case Study For a leading retail REIT, FrontLine Partner Jim Vincent assisted client with BPO strategy formulation, supplier selection, contract structuring and process migration. Objective Results » Assisted client in evaluating several different » Evaluate BPO strategies and options after existing offshore supplier was acquired by larger company, causing the supplier to steadily lose focus on our client’s account » Re-evaluate BPO strategy and structural / control options to minimize risk of repeat circumstances » Address client’s desire to broaden the outsourcing platform beyond existing work on CAM recovery pools to broader retail accounting services (six functional processes) » Find a supplier (and partner) who could evolve to truly take on the recurring BPO work as part of their operations outsourcing options ranging from strategic sourcing, Build-Operate-Transfer, joint venture and building out a captive BPO platform » Led evaluation of BPO strategy selection across seven forms of ownership and control options, based on five core criteria and 13 decision elements » Prepared RFI materials for short list of suppliers to capture relevant information to evaluate providers » Conducted evaluation, due diligence assessment and selection of outsourcing provider to meet client’s objectives in off-shoring selected processes, as well as criteria to serve as a joint venture partner » Provided transaction structuring, negotiations and closing support on the supplier contract, including key performance measures » Developed initial process migration planning and transition management efforts until BPO provider had fully scoped work and staffed up team in India 31
- 32. FrontLine Partners Case Study For a global real estate institutional investment company with over $50B in A.U.M., members of FrontLine Partners designed a portfolio of business improvement initiatives spanning all business units within the company. Objective » Increase EBITDA by 200 basis points » Improve access to and quality of business information » Define current sate processes, applications, data flows and data owners » Identify major business issues and design initiatives to address these issues » Implement a program office to manage the execution of these initiatives. » Deploy solutions to the over 900 properties under management. Results » Facilitated a group session of over 50 employees to identify and prioritize current state business issues » Setup a portfolio of 30+ business improvement projects, each with defined objectives, benefits, participants, major activities and duration » Assisted in the development of a new budgeting and business planning process which reduced the time by 40% and increased consistency across the company (translates into $1mm in annual time savings/year) » Designed and facilitated a future state design session for the Acquisitions group resulting in a new investment memo process and organizational design » Outlined the structure for a data governance program within the company » Defined the approach for a major ERP reimplementation initiative 32